U.S. Food Regulations and
Product Differentiation:
Historical Perspective
Bruce Gardner
University of Maryland
100 Year Old Discontents
• Consumer concerns about threats to
health, safety, or their pocketbooks
• Farmers’ fears of exploitation by buyers,
especially when selling products whose
price depends on quality of product
• Established firms’ claims of low-quality
products spoiling the market for their
similar but high quality products
These discontents are all related
in a general sense to product
differentiation – qualitative
differences among varieties of a
given product, or innovations in a
product, or entirely new products
related to old ones
Differentiation as Adulteration
• Beck (1846) on adulturants:
– lead for red color in cayenne pepper
• Angell (1880s):
– margarine, glucose
• Meat Inspection Acts of 1891, 1906
– “embalmed beef”
• Tea Act of 1897
Food and Drug Administration
• Pure Food and Drugs Act of 1906
• Food Drugs, and Cosmetics Act of 1938.
(FDA in USDA until 1940)
• Truthful labeling: misbranding
• Adulteration
• Standards of Identity
Minimum Quality Standards
• Marketing Order and Agreement Act of
1938
• Cover minimum size and/or grade
• Today, Mandatory in Marketing Orders for
26 commodities ($4 billion in sales)
Argument Against Mandatory
Quality Minimum
• Absent the standard, buyers who are
repelled by the low-quality products simply
avoid them
• With standard, low-quality products that
could otherwise be marketed to the benefit
of both buyers and sellers are precluded
from sale
• Probem: Argument assumes costless
detection of quality at time of purchase
Argument for Mandatory Standards
• low-quality goods create externality: experience
with a low-quality product reduces the demand
for the high-quality version
• if consumers know only the average quality of
apparently similar goods, they will buy according
to their expectations of that average quality; and
if sellers’ costs can be reduced by reducing
quality, then each seller’s interest will be in
cutting quality and free riding on the industry
average (“lemons” problem).
Market Remedy for Branded
Products
• “It is in the interest of every businessman to
have a reputation for honest dealings and a
quality product.… Reputation, in an unregulated
economy, is thus a major competitive tool.”
• “Regulation undercuts the value of reputation by
placing the reputable company on the same
basis as the unknown, the newcomer, or the flyby-nighter. It grants an automatic (though, in
fact, unachievable) guarantee to the products of
any company that complies with its arbitrarily set
minimum standards.”
Objections to Relying on Branded
Products
• For some quality characteristics and/or
some customers, the lying fly-by-nighters
may flourish
• Relying on branding opens new avenues
for monopoly power
• Relying on branding disadvantages smallscale sellers
Can Political Approaches Really
Work? Case of Identity Standards
• 1930s beginnings
• 1950s peak
• 1970s abandonment
– “It should not have taken 12 years and a
hearing record of over 100,000 pages for the
FDA to decide what percentage of peanuts
there ought to be in peanut butter” (Carter,
1979)
Critique of Regulation
• Post-Progressive Era: Meat Inspection too
much under industry influence after 1891
and even after 1906
• 21st Century: “…under HACCP, companies
were gaining control of the inspection
process and were letting dirtier meat get
distributed to consumers” (Mattera, 2004)
Regulation as Tool of Monopoly
• With FDA’s misbranding regs, established
brand manufacturers used rule making to
keep competitors from introducing
differentiated products that might impinge
on their market, by claiming that the new
product was an adulterated or misbranded
imitation of the established one (Miller and
Skinner,1984).
What to Do? Regulation to Mandate
and/or Provide Truthful Information
• Nutritional Labeling and Education Act of
1990
– Labeling requirements
– Extension and other educational programs
• Organic Standards Act of 1990
Cost-Benefit Analysis
• NLEA: FDA estimated social benefits of $4.2
billion compared to $1.5 billion costs over 20
years (based on estimae that 59 percent of
consumers changed purchases and 6,500
reduced-fat products were introduced after
NLEA went into effect. $4.2 billion is the
estimated health benefit from the resulting
improved diets (less fat and cholesterol).
• HACCP
• Organic Standards
Political Economy of Regulation
• Consumer protection advocates
• Manufacturers market protection
• Farmers’ attempts to limit buyers’ market
power
• Farmers’ attempts to gain market power
themselves
Attempts to Gain Farmers’ Market
Power through Differentiation
• Market approaches:
• “Value-added” products
• “Niche-market” products
• Political approaches:
• Hobble homogenizers (regulate contract farming,
biotechnology)
• Regulate corporate food differentiators
• Small-business subsidies
• Public education and extension
Summary: Difficulty of Assessing
Market Situation
• Multiple market failures make it difficult to
pin down the relative strengths and
consequences of departures from the firstbest in the unregulated situation. It is
therefore typically not possible to specify
with sufficient precision the legislation that
would achieve the (second best) optimum.
Difficulty of Political Solution
• Given the lobbying forces at work, it is
uncertain whether politically feasible
policies will improve upon the marketgenerated situation. The difficulty is not
only a matter of getting laws passed, but
also getting laws passed that will not
provide new tools for monopolistic
distortion of markets.